CEO Strategies: Neil Smith

How Companies Can Mine the Hidden Gold

When the new CEO of a very well-run Midwest auto insurer wanted to focus on increasing revenue, he started in an unusual way: He focused internally. "What opportunities am I missing in selling my current products to my current customers?" he asked himself.

The answer was astounding. He discovered that when a policy was coming up for renewal, the company sent out a renewal notice to customers a month in advance. But if a customer had an auto accident in the month between a renewal notice going out and the new policy going into effect, a simple computer glitch meant no increased premium was collected.

Company employees knew this was happening—they had known about it for 10 years, in fact—but they had no idea of the scale of the uncollected premium—or the cost to fix it. It turned out the cost of the computer fix was just $5,000, while the previously uncollected revenue amounted to more than $400,000 annually. The CEO was excited. The project I led with the CEO and his company found more than 300 opportunities, including this one, to increase revenue for the company by more than 15%.

Gold in Every Company

As companies begin to focus on expanding revenues rather than cutting costs, it will become a far more competitive environment than when the recession began. Economic growth will be slow, and in addition, some economic activity has been permanently displaced to more competitive industrial nations, such as China and Brazil. The age of "Super Competition" is about to begin. Companies will have more chance of winning in this supercompetitive environment if they start planning for it immediately. Now is the time to get a head start on the competition and to focus on expanding revenues. And, as the CEO of the auto insurer found, there is already hidden gold in every company.

The key to unlocking this chest of gold is in the hands of the employees. Employees typically know hundreds (if not thousands) of ways to generate more revenue, but because of the way companies traditionally work, they cannot focus on these ways, as there are internal "barriers" that prevent them from collecting the additional revenue. In the case of the auto insurer, no one realized how much revenue the company was giving up, nor how little it would cost to collect it.

Just think of your own environment. How quickly can you come up with creative ideas for increasing revenue?

Based on the work I have done with more than 30 companies in more than 10 different industries across four continents since the late 1980s, I've come to realize there are typically three types of opportunity that a company has: preventing "leakage," charging for hidden value, and collecting for hidden assets.

When Clients Get Bigger

Price leakage, such as that at the auto insurer, is common in every company. Another example happened at an outsourced payroll company I worked with. One source of revenue was an annual sum from each customer to cover administrative costs, based on the size of the customer. If a customer had 350 employees, it would pay less than a customer with 1,000 employees. Over time, almost all the customers grew in size. Even though the payroll company had perfect information about this growth (it did the payroll for the growing companies), it never moved its customers up to the next revenue band their size would have warranted. And over the years, many customers had more than doubled in size. Implementing this simple idea produced more than $2 million in annual revenue, and this was one of more than 200 changes implemented.

Companies frequently do not charge for the true value they provide. This often involves providing products or services in a timely fashion. One bank found that 65% of its commercial wires were sent in the hour before the cutoff time. This made the bank's own staffing extremely difficult. It had to staff for the peak one-hour period, which left skilled employees underutilized for the rest of the 7-hour day.

In an effort to even out the work flow, the bank changed its pricing, giving discounts for early wires and doubling the price for wires sent in the hour before the cutoff. It hoped some customers would send their wires earlier in the day. What did the bank find? Customer behavior did not change one bit. Customers valued sending wires late in the day and were prepared to pay for it. The department did not solve its staffing problem, but revenue increased by 30%!

Assets With Hidden Values

Sometimes companies have hidden physical assets that aren't core to the business, and they tend to give these away for free. One utility was required by regulators to replace its meters every 20 years. Even though most of the meters worked perfectly well, each year 5% of the meters were replaced and the old ones thrown away. Other utilities in different parts of the country did not face the same regulations. The company discovered there was a market for used meters and gained more than $250,000 annually by selling them. Again, this was one of more than 200 employee ideas that were implemented, a particularly impressive feat for a price-regulated utility.

In the new supercompetitive environment, the smart CEO will launch an early campaign to expand revenue. The very smart CEO will realize there is huge opportunity in the company backyard and will challenge his employees to look there first.

Neil Smith is the CEO of Promontory Growth and Innovation, a New York consulting firm that helps clients increase revenues and reduce costs in innovative ways.